Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Wednesday, August 19, 2009

Healthcare reform

The current debate's lack of coherent content has been quite startling, and indeed dismaying insofar as one naively hoped for better.

I generally support what the Obama Administration is trying to do (though sometimes what that is, isn't entirely clear). In 1993, I was unsympathetic to the Clinton plan, but since then my view of how well the U.S. healthcare market functions has darkened. More on that in a moment. Unfortunately, I don't think the Administration has conveyed any clear sense of what it is trying to do, or why.

Concerning the other side in the debate, perhaps the less said, the better. I really can't say anything temperate at this point.

What is the set of problems to which the Administration's healthcare reform proposals might, with luck, be an at least partial solution? Brad DeLong once put the point quite crisply (in his moderate rather than shrill persona). To liberal economists, the big problem is adverse selection. To conservative economists, the big problem is moral hazard. And I myself would say they're both right, plus there also are externalities.

On adverse selection: Anyone who is facing uncertain healthcare expenses ought to want insurance, smoothing out the actual cost towards the expected cost. Our healthcare market does not work well to solve this problem, and that's a big reason for the millions of uninsured. The tax subsidy for employer-provided insurance contributes to this, by making risk pooling much harder for the people left over after these generally healthier groups have been cherry-picked out of the pool (so to speak).

Adverse selection, making fairly priced insurance unavailable, is inherently a big problem in healthcare if the government doesn't somehow mandate pooling, given that people often will know more about their expected future health than insurance company doctors will be able to learn. But the system created by tax benefits certainly has made things worse.

Myopic or irrational failure to insure (until it is too late) when one should have also is a problem. Likewise, the prospect of free care in the ER if one has a crisis may create an individually rational reason for under-insurance, but involving a fiscal externality. When you count as well the adverse effect on risk-pooling of people's staying out of the insurance market (contributing to adverse selection), there's a good case for mandating health insurance coverage, just as Social Security effectively mandates retirement savings.

There is an argument on the other side - why give me (or make me buy) something that costs $X if I value it at less than $X - but while that's often a good argument I personally would reject it on balance here. Note, however, that this argument applies equally to making me buy something for $X and giving it to me for free (since in that case we could simply have given me the $X instead). And the question of whether I pay the $X or get it for free is simply an input to the overall issue of post-tax and transfer wealth distribution in the society (which is not to diminish its importance, but just to put it in the proper larger context).

And finally, mixed in with adverse selection (though conceptually distinct) is that we may favor redistribution from those facing low expected healthcare costs to those facing high expected costs, in particular to the extent that brute luck rather than choice underlies the difference. Thus, mandatory insurance for which everyone was charged the same amount might be defended as combining a solution to adverse selection with a deliberative redistributive policy. By the way, lest this sound a bit lefty, it is distributionally equivalent to what the George H.W. Bush Administration would have proposed it if Bush I had won the 1992 election, via risk-adjusted subsidies for the purchase of private health insurance.

OK, on to moral hazard. One key reason the U.S. healthcare system is so wildly expensive relative to the benefits provided (where the comparison is other economically advanced countries, where people get comparably good healthcare for much less) is that we have half of a free market system, in effect - which can be worse than no market system at all. Consumer demand drives the market, but it is largely the demand of subsidized consumers who are not actually paying at the margin for what they get. Suppose that in the market for groceries or cars we had consumer demand in the driver's seat (as we do), except that people didn't actually have to pay for what they purchased (or maybe they just had a small co-pay). Whole Foods and GM might like this, but it wouldn't be good socially. Yet in healthcare, that's effectively what we have, much of the time, for people on Medicare, Medicaid, or employer-provided health insurance that overpays at the margin (relative to the optimal insurance level) due to the distorting effect of the tax subsidy.

Perhaps the food or cars analogy overstates the problem in a couple of respects. Good food and cars are fun in themselves, getting healthcare isn't and hence I'd generally only do it out of the belief that my health will benefit. Plus, doctors to a large extent tell healthcare consumers what to do. But the latter is actually a big part of the problem - they don't bear the marginal costs either, and have some reasons of both ideology and self-interest (earn more fees or practice overly defensive medicine) for recommending treatments that aren't actually worth their cost to the patient.

So we have a terrible healthcare system that surely could be vastly improved. I take the Administration to be addressing the adverse selection problem by extending health insurance to the uninsured population. Also, it may want to address under-treatment of this population (which exists alongside over-treatment of others), which I think of as a distributional issue, because being sick and treatable, but unable to afford the treatment, should raise one's estimate of the marginal utility that a transfer via free provision of the needed service would provide.

The Administration would also perhaps like to address the moral hazard problem, which is a key input to the horrendous problems of long-term fiscal unsustainability that the U.S. currently faces. Many observers are skeptical, I would guess rightly, of the progress that the current proposal would make on this front. Unfortunately, addressing it really requires bipartisanship, since cutting benefits is politically unpopular. And the Republicans couldn't make any clearer their unwillingness to cooperate in any sort of good faith effort to address waste and put healthcare outlays on a sustainable path.

One of the many offensive and odious aspects of the Republicans' hateful lying about death panels and the like is that they are actually the ones who want to provide less treatment. For those among them who are sane and believe in civil society, this mainly reflects concern about moral hazard and/or a libertarian distributional view. The rest, apparently a large majority of their number, do not bear discussing.

7 comments:

A generally well-written and balanced article, at least until the last two paragraphs. which seem rather gratuitous; however, I see no support for the idea that the Obama administration (or any of the proposals creeping through Congress) is addressing the moral hazard issue at all. Perhaps you could amplify that point? I have seen very little sensible written on solutions. The closest so far is an article in The Atlantic.

Well, as one of those individuals, educated in Law and Economics, and who tends to vote Republican, and who also considers himself sane and civil, and a firm opponent of all offensive, odious, and hateful lying no matter where it originates, please allow me to offer my two cents on the set of problems you have discussed here.

1. I also generally support efforts for American health care reform and agree that the current system functions terribly for many, and is "unsustainable" (though, I'm sorry to say, what I regard as a mostly financial concept seems to have become increasingly loaded with political connotation as of late). My liberal friends say (offensively, I think) that I, "acknowledge" or "concede" that there are problems, but I try to explain it is condescending to assume that people that disagree with them as to possible solutions are merely stubborn deniers of reality and obstinate impediments to any kind of progress.

To be clear, I do not believe "no change" is a legitimate position, but the question is "what change?" and the possibility remains that some proposals could yield worse results than even our current broken system. I do in fact want, and even demand that, my representative cooperates in a good-faith, bipartisan effort to improve our system, but that doesn't imply that such compromises are actually on the table of those who are in power, and therefore, in control of the options. For example, many Democrats have recently made clear the "unacceptability" of any plan that might solve the adverse selection problem (perhaps with a system of vouchers or reimbursement for private coverage for the poor) without a "public option". If guaranteed, universal, affordable coverage is the goal, and adverse selection the problem to fix, then it is hardly bipartisan or pragmatic to insist on one particular way to achieve it that is ideologically disagreeable to the other party when an equally effective alternative might be acceptable.

2. The fundamental problem, in my view, is the high and increasing (faster than wages and inflation) cost of (real, per capita) medical care. I believe this cost problem is the true generator of the magnitude of the adverse selection, moral hazard, and distributional issues. It's a very rough analogy, but if routine maintenance and the occasional unexpected serious repair of our bodies were comparable in price to fixing our automobiles, then besides some concerns for the extremely poor, we wouldn't worry much about the above issues.

As as aside - the auto-insurance mandate is not so much a mandatory pooling but, essentially, one of adverse selection - where we take the community of poor people who could potentially afford to purchase an automobile and pay for gas, but who could not, in addition, afford to smooth out their expected, driving-caused liabilities though regular payments, and we kick them off the road. Few people object to this arrangement. It's not a life-and-death issue, of course, but there is actual harm to poor people in most of our driving-dependent country, and nobody talks of subsidizing auto-insurance for these folks.

3. When you say, "...they are actually the ones who want to provide less treatment." I respond that is a misleading appraisal of at least my views. I want as much, and as high quality, treatment for as many people *as we can afford*. In other words, I concur with the propriety of some level of public subsidy, but I will insist that it be budgeted - that is - limited to some range (perhaps described in percents of GDP) of government outlays as a country should reasonably be expected to expend without sacrificing the other, equally important public services and private-sector activity that our society requires. This is much in the same way that the NATO nations try to establish the "right" amount of spending on national security at 3% of GDP (give or take).

A basic conservative concern is that "bending the curve" cost-control talk among their liberal opponents is generally lip-service to a concept about which they are, in actuality, insouciant. The suspicion is that the real intention of all this is to establish a European, social-democratic style, nationalized health care system *no matter what it costs or requires in higher levels of taxation, debt, and regulation*.

4. In this sense, it is indeed ironic, and perhaps disingenuous, that many Republican political activists have derided the budgeting elements of the various Democratic health care proposals that have taken the shape of IMAC boards or other versions of the UK's NICE of their NHS. The important distributional issue here is not necessarily "whether" to transfer from healthy to sick, but "how much is too much".

I would prefer that we find ways to lower the aggregate cost of the same amount and quality of care (similar to progress in technology), but absent some way to accomplish that goal in the short-term, any system of budgeting will require someone, somewhere to make choices somehow about what will not be paid for no matter what the distributional principles. A clever way for the Democrats to make this point is to force the Republicans to offer some alternative way to fairly control total costs - something I don't think they have a good answer to.

On the other hand, some of the arguments being made by Democrats in favor of reform have highlighted the alleged cruelty and improper profit motives of demonized private health insurance companies making similar denial-of-care decisions.

In the end, I would roughly guess, denying certain kinds of costly care based on a profit motive in a competitive environment (where one has to worry that denials will scare away customers to other providers) is probably not all that different from decisions that would deny possibly different kinds of costly care based on a fixed-budget motive in a democratic environment (where one has to worry the denials will ruffle politically powerful special interest groups).

Neither side has made any sense whatsoever on why their denials are acceptable while the other denials are evil. From the point of view of a voter who's going to be denied hyper-costly care no matter who is in charge, the alleged moral distinguishability of two scenarios which leave them in identical situations is probably moot.

"You already have denials, and rationing, and death panels, they're just in the private sector, so it's irrational to fear this bill's attempt to handle them in - what I claim is - a more sensible and fair manner." is in some sense true, but it's not a very persuasive political argument in terms of making one excited about change.

5. One final thing about moral hazard. People, especially young ones, do reckless things with their bodies as a rule, and they will pursue activities with higher probabilities of disaster if they perceive they are "covered" in the case that something goes wrong. As an example, I read a story about a low-income 21-year old (still covered under his parents' health plan) who had, for whatever reason, taken a fancy to filming his own frequent "XTreme" improvisational ski-jumps. Well, you know where this is going. He fell once and broke, well, pretty much everything. I'm told you can see the horror of it all on YouTube.

His eventual medical bills were truly astronomical, but, to his glee and astonishment according to a later interview, the insurance company covered everything beyond the deductible with little hassle. The, supposedly, "good news" at the end of the article was that due to the success of the extraordinary medical efforts, he was "back in the game", which to me means only a matter of time before he gives his weary bones another dreadful surprise. I doubt any private company, compassionate or not, would be foolish enough to maintain his coverage, and since he's a ski-bum wannabee star and will probably never make a fraction of what it will cost to fix him up again - I'm thinking Medicaid will pick up the next tab.

Now, I'm honestly asking, what should I do about this particular gentlemen and his ilk? What should I think about the way these reform proposals treat people like him?

As a heartless Republican, my cruel instinct is that it seems somehow unjust that responsible people who abstain from such thrills should have to pay a single thin dime towards this fellow's ridiculous bills, especially not the *second* (inevitable!) time. But short of banning amateur ski-jumping, it seems like this guy, because of our moral qualms about letting even our reckless idiots die on the slopes, has a kind of inalienable first mortgage on the rest of our incomes.

The moral hazard is that he should be adversely unselected, but isn't - and gets his distribution regardless because of the particular nature of who he is, how little he makes, and what he likes to do, contrary to all good sense, with his poor limbs.

His is an extreme case, but you know where this is going too. Many of the costs that any potential reform plan would pay are, to some extent or another, "our own damn fault", not necessarily to the degree of Mr. XTreme here, but perhaps not so far removed.

The Republican view is that none of the reforms suggested do anything whatsoever about this issue. The private sector as currently regulated, will, at least, cut you off, which (if one has any faith at all in humanity) one would guess would deter lots of people from ever attempting gravity-defying acrobatics over snow in the first place.

Any reform where one can never lose their coverage and also never worry about going broke, to the extent it encourages more reckless behavior, is, at the very least, unpalatable to the typical conservative.

Indyresolve, thanks for your very thoughtful and interesting comments. One unfortunate effect on me of what I regard as the unmitigated Republican madness of the last 15 years is that it pushes me, in response, to places where (or comrades in arm with whom) I'm not otherwise entirely comfortable.

Just to mention one point, my saying that Republicans want "less care" was a shorthand. Principled conservatives, but also in fact everyone, should want "less care" where the benefits provided by the care are less than the cost of providing it. So in that sense I certainly want "less care" in a number of cases where it's provided due to the subsidies today.

On moral hazard: I am enough of a utilitarian to say I want to provide care even to the careless and reckless if we ignore the incentive issue, i.e., if they will do crazy things whether or not they end up paying the price or get to shift it to someone else. From a straight utilitarian perspective, effects on choice via incentives are the only reason to hesitate about rescuing people from the consequences of their own mistake. But we all have (certainly I do) a strong intuition against this. (I choose utilitarianism from among my conflicting impulses despite having feelings that are clearly inconsistent with it.) Push the anti-utilitarian perspective too far and it becomes unattractively heartless. E.g., the moment you make a mistake, we won't do anything to help you. But push the utilitarian perspective too far (as I admittedly am willing to do) and you run afoul of moral sentiments that I certainly have about people who do crazy things being less deserving.

Why just pick the Democratic way of solving the problems, is another question you ask. I am with you on this one. I am far from convinced that the current approach in the proposal, or even the approach we'd have if it moved further to the left, is best. I recall with some sympathy the alternative and more honest conservative-friendly approach that I mentioned in my blog entry, concerning risk-adjusted vouchers. My main problems with that approach are (a) it doesn't entirely avoid incentive problems insofar as people (through food and exercise decisions, for example) choose their risk level rather than having it handed to them, and (b) to avoid an adverse selection unwind, it requires the government to do a good enough job setting the risk-adjusted vouchers such that insurance companies can't outsmart it and cream-skim relative to voucher value. But that is not to say that these problems would make that approach worse than the type that Democrats and the left discuss.

The problem is that, if one believes (as I do) that the Republicans have gone stark raving mad and become a nihilistic or Bolshevik style party that will do anything for power and is utterly devoid of any interest in good governance, the Democrats, awful though I find them in many ways, are the only game in town.

If people like you or Bruce Bartlett were running policy on the Republican side of the spectrum, I would be very much betwixt and between. While I'm more inclined than you are to compassion towards the undeserving, I share a lot of points from the (pre-madness, sincerely held) conservative critique of government decision-making. And I am personally a bit of a contrarian individualist, which makes me more of a libertarian temperamentally than intellectually.

Anyway, thanks for your comments, which only add to my regrets about living currently in a political world where I can't take the same sort of above-the-fray or equal-plague-on-both-their-houses view that I fancied prior to 1994.

The other day, I received an interesting and very instructive e-mail from my brother Jeff who lives in France. He asked me to share it with the readers of my blog. I think I will share it with you also.

“As an American who has been living in Europe for most of the last 20 years, one who has visited doctors numerous times in four different countries, whose two children were brought into this world in European hospitals (France and England), who has himself spent a week in a public British hospital, and who underwent an operation in a private British clinic, I think I can say a thing or two about health care in Europe.

“Our out of pocket expenses for the births? Zero, even though in France my wife spent 5 days in the hospital after the birth, which is standard, by the way.

“During the three years we lived in England, we never once paid for medicine for our children. Children get drugs for free in the UK. Visits to the GP are free for everybody.

“My expenses for the week in the NHS hospital? Zero.

“The cost of the operation in the private clinic? Zero, it was covered by my work insurance, as was the post-op physical therapy I needed.

“In Western Europe you would never be forced to sell your home in order to pay for your medical bills, as happens all too often in America when catastrophic illness strikes and the insurance company decides that your condition was ‘pre-existing’.

“The quality of the care? Mostly good. French hospitals are excellent, even the food is decent. The food at the NHS hospital was beyond awful, but then again most English food is pretty bad (though they do have great Indian food). At night, they were understaffed, but I am guessing that, apart from that place where Dr. House works, most American hospitals are understaffed at night, too.

“In short, in the US, you pay more, get less, and die younger than we do in Europe. What part of that don’t you understand?

“My fellow Americans, you have nothing to fear except those who would use fear to keep you enslaved to the myth of the might of the American health care system.”

Jeff Degan

What can I tell you? The guy is a Communist. Not only does he live in France, he actually likes it there. An eternal shame to our family's good name. Let us boil down his seven paragraphs to their juicy essentials, shall we?

HEALTH CARE IN THIS COUNTRY STINKS.

Here is (Excuse me, I meant to say, “Here was“) a golden opportunity for real reform and the idiotic Americans are screaming about socialism. Is it any wonder that we have become the laughingstock of the Western world?

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 24 and 21) as well as three cats. For my wife Pat's quilting blog, see Patwig’s Blog.